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The purpose of this single-case study was to investigate corporate fraud by examining the possible reasons for the unethical decisions that were made by leaders of Adelphia Communications. A review of recent literature on the topic of unethical decision making and its causes in American corporations is presented in this chapter. Particular attention is paid to research on moral cognitive development, moral disengagement, and ethical work climate. Unethical corporate behavior is not a new problem and researchers have evaluated the phenomenon, resulting in several viable theories to explain the problem, as well as leaving gaps that present opportunities for additional research. The intent of this review of literature is to support and substantiate the conceptual framework, offer details on the problem, and develop connections between previous research and the questions used in this study.

Documentation

Research for this literature review was conducted by searching multiple scholarly and business databases including ProQuest, EBSCOHost, Business Complete,

LexisNexis, and Hoovers, as well as peer-reviewed journals available in the Sage journals, ABI/INFORM, and Emerald management journals databases. Searches were also conducted for textbooks, dissertations and abstracts, and electronic materials. Internet searches were performed using Google Scholar and Google. Key terms used to

retrieve information on ethical decision making and corporate fraud included ethics, morality, corporate fraud, corporate scandal, morality in the workplace, fraud in the workplace, ethics in the workplace, ethical decision making, business ethics, ethical work climate, ethical culture, moral disengagement, moral cognitive development, values, ethics training, and moral leadership.

Searches pertaining to research and case studies on corporations that have experienced fraud and unethical decisions were conducted using key words and phrases including Adelphia Communications, Enron, Martha Stewart, HealthSouth, John Rigas, NewsCorp, WorldCom, Tyco, AIG, Global Crossing, and Qwest. These various searches returned peer-reviewed journal articles, newspaper reports, magazine articles, books, and websites. Ninety-three articles, 28 books, and 15 websites and case study databases were used for this review.

Case study research in this context needs to be distinguished from educational case study, which is used to teach business in many universities. Practical exploration of theoretical studies creates a great learning opportunity, and case study used in the classroom may promote skilled decision making and engaged discussion around a real- life situation. However, the criteria for producing classroom case study materials do not include the same rigor as case study research used either to test theory or to explore areas of current limited knowledge (Darke et al., 1998; Yin, 2009).

Corporate Ethical Dilemma

In 2002, President George W. Bush created the President’s Corporate Fraud Task Force to restore confidence in American business. Since that time, there have been more than 1,300 corporate fraud convictions of 200 chief executive officers, more than 120

vice presidents, and more than 50 chief financial officers from companies across America (U.S. Department of Justice, Office of the Attorney General, 2012). President Obama, building on Bush’s Fraud Task Force, created a Financial Fraud Enforcement Task Force in 2009 to hold accountable those who had caused past financial crises and to prevent them in the future (U.S. Department of Justice, Office of the Attorney General, 2009). By the end of 2011, there were 242 indictments and 241 convictions of corporate criminals in the United States, along with more than 1,800 securities and commodities fraud pending cases (U.S. Department of Justice, Federal Bureau of Investigation, n.d.). There have been fewer convictions under Obama’s administration overall, although the Obama administration came down hard on SAC, a major hedge fund firm, for illegal activity, which made major headlines (Lattman & Protess, 2013). And data available from the U.S. Department of Justice, Federal Bureau of Investigation (n.d.) show monthly indictments and convictions averaging 15 or more per month.

Despite the crackdown on corporate fraud and legislation put in place to require executives to be aware of fraudulent financial activities in their organizations (Sarbanes- Oxley Act of 2002, n.d.), the unethical behavior continues. Companies like Enron, Adelphia, Tyco, and Lehman Brothers collapsed under mismanagement, and unethical decision making is at the core of the mismanagement (Copeland, 2005; Duska, 2005). Many companies have standard legal principles on which they base decisions (Bowen & Heath, 2005), so perhaps more attention should be paid to ethical principles.

The concept of ethics has been applied to the study of business since the 1950s, with the topic of corruption headlining much of the research (Rabl, 2011). Through the evolution of ethics and morality theory, the early discussion and application was

primarily from a societal perspective rather than a business perspective (Ciulla, 2004). Moral cognitive development theories offered by Piaget (1977), Maslow (1969, 1999), and Kohlberg (1981, 1984) proposed stages of moral development in human beings, but did not apply the characteristics of those stages to the business community or to

leadership capabilities. Ethics as a critical part of business leadership was barely a topic of research as late as 1974, when the third edition of Bass & Stogdill’s Handbook of Leadership (Bass, 1974/1990), a top leadership “bible,” was published. Of the 1,150 pages in that work, fewer than four were devoted to ethics (Bass, 1974/1990).

As the 20th century wound to a close, theorists started to link ethical leadership to the styles of servant leadership and transformational leadership. However, the broader public acceptance of a connection between ethics and leadership was not achieved until the collapse of Enron in 2001, when fraud by corporate leadership made front-page news around the world. Enron quickly became notorious for unethical leadership, and its collapse brought to light the excess privilege and deceit of its leaders, none of whom stepped forward to accept responsibility (C. E. Johnson, 2005).

In 1985, a survey conducted jointly by The New York Times and CBS indicated 58% of Americans believed corporate executives were dishonest. While there was certainly corporate fraud prior to Enron, there was none as large and as publicly covered as Enron was at the time. In the 10 years since passage of the Sarbanes Oxley Act of 2002-- the post-Enron reform that was supposed to end questionable financial accounting practices-- stories of fraudulent behavior make it unclear whether anything has changed:

• 2002: “Prosecutors indicted ex-Tyco International CEO Dennis Kozlowski, former CFO Mark Swartz and ex-general counsel Mark Belnick Thursday on

charges of orchestrating a web of deals that looted the company of at least $600 million” (“Three Tyco execs indicted for fraud,” 2002).

• 2003: “SEC charges HealthSouth Corp. CEO Richard Scrushy with $1.4 billion accounting fraud” (U.S. Securities and Exchange Commission, 2003) • 2004: “A federal jury found Adelphia Communications Corp. founder John J.

Rigas and his son Timothy, the former chief financial officer, guilty of conspiring to loot the cable television company of millions of dollars” (Masters & White, 2004).

• 2005: “New York Attorney General Eliot Spitzer sued American International Group Thursday, alleging the firm manipulated its books to deceive regulators and the investing public” (“Spitzer sues AIG,” 2005).

• 2008: “Bernard Madoff, a prominent money manager and former chairman of the Nasdaq Stock Market, has confessed to losing $50 billion of his investors' funds in a Ponzi scheme” (“Madoff fraud hits investors worldwide,” 2009) • 2011: “Britain’s biggest selling Sunday newspaper will close after failing to

hold itself to account in the phone hacking scandal, it was announced last night” (Wells & Willetts, 2011)

• 2012: “JPMorgan’s black eye nears $6B as bank says traders may have tried to conceal losses” (Wagner & Gogoi, 2012).

One website, WanttoKnow.info (“For Those Who Want to Know,” n.d.), lists 50 pages of corporate corruption news stories for 2012 alone. Public outcry has been strong. Results of a 2009 poll indicated the vast majority of Americans gave corporate America a grade of either D or F for honesty and ethical conduct, with 58% of respondents saying

that leadership in corporate America was “poor”(Knights of Columbus & Marist College Institute for Public Opinion, 2009).

Frameworks for Ethical Leadership and Decision Making

With unethical corporate leadership a topic of increasing interest, research and analysis on ethical leadership and decision making has increased since 2000 (Kish- Gephart, Harrison, Treviño, & Klebe, 2010; M. Moore, 2008; Rabl, 2011; Selart & Johansen, 2010). Searches of major business databases using the general terms of ethical decision making and ethical leadership yielded more than 3,000 peer-reviewed articles, an indication of the interest in understanding more about this topic.

Researchers in the past have attempted to understand a variety of aspects of ethical conduct in the workplace and approached the issue from multiple perspectives or frameworks including sociology, psychology, philosophy, and organizational science (Rabl, 2011; Treviño, Brown, & Hartman, 2003; Treviño et al., 2006). However the framework for this study was informed by a combination of early cognitive moral development theory (Piaget, 1977), ethical climate theory (Victor & Cullen, 1988), and moral disengagement theory (Bandura, 1986, 1999).

Ethical Decisions and Cognitive Moral Development

Researchers from the perspective of organizational science have generally considered ethical decision making to be “a conscious, intentional, and deliberative process” (Zhong, 2011, p. 2). This analytic and cognitive point of view was influenced by Kolhberg’s (1981, 1984) cognitive moral development theory, which describes moral reasoning as something that is developed in multiple stages as an individual matures.

Some people are able to attain higher levels of cognitive morality than are others, according to Kohlberg (1984).

Kohlberg’s (1981) three stages of development (preconventional, conventional, and postconventional) all focus on a rational decision being based on conscious reasoning and analysis of a moral situation, as if one were a judge weighing its fairness. The

preconventional stage is seen mostly in children. This stage is self-serving and decisions are based on consequences (possible punishment). Conventional thinking comes later, when the individual is able to consider the impact on people around him or her. The individual who is capable of postconventional thinking adheres to rules, laws, or standards; employing postconventional thinking becomes a way of “promoting general social welfare” (Zhong, 2011, p. 2) in which a decision is based on more complex reasoning.

Critical to cognitive theory is the ability of the individual to recognize a moral dilemma so that he or she may make a rational decision. Rest (1986) proposed that one must first recognize a moral dilemma, judge it, establish moral intent, and then make a decision regarding it. Basic moral awareness is fundamental to moral behavior and thus to the ability to recognize a moral dilemma (Blum, 1991; VanSandt, Shepard, & Zappe, 2006). An exploration of more than 90 research articles on ethical decision making leads one to the realization that moral awareness is not enough to make an ethical decision. The environment in which one makes the decision has much to do with how the decision is made.

Ethical Climate Theory as a Predictor of Moral Awareness

Most early research on ethical climate is attributed to Victor and Cullen (1987, 1988), who proposed a framework for ethical culture by building on Kohlberg’s (1984)

three stages of cognitive moral development. While Kohlberg referred to the

preconventional, conventional, and postconventional stages of moral development, Victor and Cullen (1988) stated that ethical climates might be formed in three similar levels of ethical theory: egoism, benevolence, and principle. An egotistic climate is self-serving, and employees in this climate will form decisions in their own self-interest. In a

benevolent climate, employees will tend to take others into consideration when they make decisions. If the culture is principled, decisions will be based on codes and rules (Victor & Cullen, 1988). These three classifications, described in terms of an

organizational environment, exhibit the same sequencing of personal moral reasoning as Kohlberg applied on an individual level (Ambrose, Arnaud, & Schminke, 2007;

VanSandt et al., 2006).

An ethical culture reflects “the collective ethical values and behaviors of all employees, managers, and leaders” (Gebler, 2006, p. 337). Such a culture involves shared moral reasoning and will influence employees to be loyal and to make the best possible ethical decisions when challenges arise (Ambrose et al., 2007; Duh et al., 2010; Van Aswegen & Engelbrecht, 2009; Victor & Cullen, 1987). Research indicates that an ethical work climate is a “primary predictor of individual moral awareness” (VanSandt et al., 2006, p. 409).

Companies and their leaders do not set out to be unethical; most companies have established elements in place to protect against unethical behavior. The Sarbanes-Oxley Act of 2002 (n.d.) was passed to respond to the growing number of instances of corporate fraud and the resulting decline in investor confidence. The legislation requires every public company to adopt a code of ethics, a mandate that was intended to help deter unethical behavior (Schminke, Arnaud, & Kuenzi, 2007). In general, companies that have a code of ethics and a set of corporate values show an intent to practice high integrity (Mayer et al., 2010; Parboteeah et al., 2010), but unless codes of ethics and sets of corporate values are enforced through specific and targeted management practices, they will not create an ethical culture (Schminke et al., 2007; Stevens, 2008). Leaders must exhibit the characteristics of the code and be accountable for enforcing it. They must “walk the talk” with actions that support ethical decisions and behaviors, even if the company might suffer financially. For example, if research in a pharmaceutical company shows a product to be harmful, the leader in an ethical culture must make the decision to pull the drug from the market and to alert customers who have bought it. As Van

Aswegen and Engelbrecht (2009) remarked, “An organization’s ethical climate should be a natural overflow of leaders’ commitment to ethical principles and values expressed in their daily struggle to live by them” (p. 176).

Because organizational climate is, by definition, the way the employees and management of a company perceive the company, there is a need to look at the factors affecting that perception. Those factors could relate to individual characteristics such as age, gender, and job satisfaction, or to situational variables within the company such as one’s department or position in the hierarchy (D. V. Cohen, 1993; Gebler, 2006). It is

also possible to have different climates in different divisions of the company, especially within groups whose members work together for a long period of time and develop a level of trust and understanding (Martin & Cullen, 2006; Vardi, 2001). The form of the company may play a role in determining the perception of ethical climate. Whether the organization is a corporation, a not-for-profit entity, or a family-owned business, that structure may predict different perceptions of ethical climate (Martin & Cullen, 2006; Schminke et al., 2007). The orientation of the firm (entrepreneurial versus bureaucratic, for example) and its leadership and management style will also affect ethical climate perception (Ambrose et al., 2007; Cullen et al., 1989).

For the purpose of this study, it was critical to explore the role of corporate leaders in creating, promoting, and maintaining ethical climate. Work climate can affect behavior, attitude, and overall corporate success or failure (Schminke, Ambrose, & Neubaum, 2005). Leaders need to model correct behavior, which in turn will help enforce the employee behaviors that are acceptable in the workplace (Clement, 2006). Stringer (2002) stated, “the single most important determinant of an organization’s climate is the day-to-day behavior of the leaders of the organization” (p. 12). This correlation was reinforced in a recent study by Mayer et al. (2010), empirically confirming a link between ethical leadership and employee misconduct.

Rest (1986) proposed individual ethical decision making could only come about through the psychological processes of moral judgment, moral sensitivity, moral

motivation, and moral character. More recently, others have suggested that individual morality also applies to the moral climate of the workplace, and that shared moral norms are essential for an ethical organizational climate (Arnaud, 2010; Mayer et al., 2010;

Victor & Cullen, 1988). Tension may arise in organizations in which there is a disconnect between the leaders’ values and those of the employees, influencing the employees’ attitudes toward loyalty, job satisfaction, and the desire to leave (Schminke et al., 2005). Schminke et al. (2005) empirically proved a relationship between the extent to which a leader uses his or her moral reasoning and the ethical climate of the organization. What might we find in the levels of moral awareness if research were conducted using a group of corporate leaders who have all been found guilty of corporate corruption? An

extensive search of literature yielded no such study and such an investigation exceeded the scope of the current study.

As part of a leader’s moral responsibility, Parboteeah et al. (2010) suggested lack of communication and poor empowerment of employees are two major threads in

corporate climates in which ethical scandals have been experienced. Managers and leaders can promote adherence to ethical standards through strong written and verbal communication, frequent group meetings, and constant application of corporate standards to employee actions and decisions (Parboteeah et al., 2010). Lack of consistent

reinforcement by management may make it difficult for employees to make their own moral decisions, while empowered employees generally make decisions that benefit the workplace (Elçi & Alpkan, 2008).

Leaders’ values generally help shape the climate of an organization (Brown & Mitchell, 2010), and an ethical leader can be a strong role model in a company (Treviño et al., 2006). When leaders exhibit unethical behavior, few employees will remain untouched. The overall climate will be one of poor communication, low morale, and a lack of personal empowerment (Parboteeah et al., 2010; Stevens, 2008; Uhl-Bien &

Carsten, 2007). Some executives are aware of the connection between their behavior and those of their employees. In a speech in 2006, Boeing CEO Jim McNerney (as cited in Uhl-Bien & Carsten, 2007) said, “If an organization’s leaders don’t model, encourage, expect and reward the right behaviors, why should anyone in that organization exhibit those behaviors?” (p. 187).

A premise of hierarchical organizations is that those individuals at the higher level make the rules and those individuals at the lower level follow them. Often, employees believe or are told it is not their job to question, creating a climate of blind obedience, rather than one in which employees are empowered to openly communicate with and challenge their leaders. These sentiments can encourage an unethical climate in which silence and fear are the norms and dialogue is forbidden (Uhl-Bien & Carsten, 2007). Environments in which dialogue is discouraged may lead employees to fear retaliation for exposing unethical behavior (such as was the case at Enron, Adelphia, and WorldCom). The worst consequences of silence and following a leader unwaveringly were

exemplified in the horrors of the Jonestown Massacre (“Inside the Jonestown massacre,” 2008), in which most of the followers of a charismatic cult leader drank poison and died. In studying ethical climate and its predictors, little research appears to have been

conducted on empowerment of lower level managers to provide ethical leadership

upward when it is seemingly lacking at the top. Remaining silent out of fear of retaliation should not be the standard in any environment.

Can individuals with varying degrees of moral development coexist successfully? Kohlberg(1984) believed they could, while Victor and Cullen (1988) pointed out that “behavior compliance with a group or organizational climate incongruent with an

individual’s level of moral development may lead to adaptive reactions such as stress or whistle blowing” (p. 105). People may behave unethically when they do not feel attached to the organization. In other words, when there is a disconnect between personal values and needs and those exhibited by the management of the corporation, the employee may no longer feel a commitment to the organization (Kapstein, 2011). Corporations seem to have their own sets of ethics that define them, just as individuals do, but in a corporate situation, individuals are more prone to follow the guidelines and pressures of the corporation than their own personal values (Cullen et al., 1989; Kapstein, 2011; Thompson, 2010), possibly opening a door to fraud.

Moral Disengagement as an Enabler to Unethical Behavior

According to Bandura’s (1986, 1999) theory of moral disengagement, some people, through their own cognitive process, are able to ignore or override their personal ethical codes of behavior without any feelings of guilt. This suspension of personal ethics allows individuals to make decisions that would be considered unethical by the

population in general (Bandura, 1999). Carrying this logic into the workplace, if there is any apparent moral disengagement on the part of the leader, moral disengagement will